Frontier Communications (FTR) looks a lot like Chuck Wepner after his fight with former heavyweight champion Sonny Liston. Like Wepner, Frontier has been relentlessly pounded, although this pounding is taking place in the market, where Frontier closed below $5 a share and its yield went over 15% by the close of the market on December 15. After the fight, which Wepner lost, he needed 120 stitches to stop the bleeding. How many stitches will Frontier need to get patched up?
I wrote an article on Frontier November 28, when it was trading at $5.39, that recommended a way to capture the dividend and trade the stock using covered calls to reduce risk. I obviously did not expect to see the stock lose nearly 10%, or $0.52, in the two weeks since I wrote it. And, when seeing a move of this magnitude, I start looking for reasons.
The stock went ex-dividend by $0.1875 per share in the intervening period, and that could account for about one-third of the decline. Still, that leaves a lot unaccounted for, and it ignores the fact that the stock climbed from $5.39 to an intra-day high of $5.85 on December 5 before going ex-dividend and seeing the rapid reversal. There have been no press releases by the company indicating any changes in strategy or reductions to the dividend.
There was a press release on December 2nd about the company moving from the NYSE to the Nasdaq on December 16. The reason for the move is to save money. Is it possible that some index portfolio shifting caused the decline? It is possible, but that doesn't explain the fact that the stock moved to the $5.85 level after the announcement. It is just as likely that the announcement helped the shares move higher due to the same portfolio shifting for Nasdaq funds.
One explanation might be the December 2 announcement by Verizon (VZ) that it was acquiring wireless spectrum.
SpectrumCo, LLC, a joint venture between Comcast Corporation (CMCSA), Time Warner Cable (TWC), and Bright House Networks, today announced it has entered into an agreement pursuant to which Verizon Wireless will acquire its 122 Advanced Wireless Services spectrum licenses covering 259 million POPs for $3.6 billion. Comcast owns 63.6% of SpectrumCo and will receive approximately $2.3 billion from the sale. Time Warner Cable owns 31.2% of SpectrumCo and will receive approximately $1.1 billion. Bright House Networks owns 5.3% of SpectrumCo and will receive approximately $189 million. ...
The cable companies, on the one hand, and Verizon Wireless, on the other, will become agents to sell one another's products and, over time, the cable companies will have the option of selling Verizon Wireless' service on a wholesale basis. Additionally, the cable companies and Verizon Wireless have formed an innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services.
Karl Bode wrote about the threat to Frontier's DSL business that this deal could present. The headline of his article reads "SpectrumCo Deal Could Spell Trouble for DSL - Verizon Could Target Other Telcos With LTE." While this is all possible, the threat is not immediate. The transaction, according to the joint press release "is subject to approval by the Federal Communications Commission and review under the Hart-Scott Rodino Act and other customary conditions.
Still not satisfied that this explained the price action, I decided to go back and carefully listen to two recent investor conference presentations by senior Frontier executives. The first was by David Whitehouse, Senior Vice President & Treasurer at the Bank of America Merrill Lynch (BAC) Leveraged Finance Conference on December 1. He revealed nothing new as he talked about the rollout of broadband availability, continued progress on merger related cost synergies and the conversion of the remaining nine states to Frontier's legacy systems. During the Q&A, not surprisingly, the first question was about the company's dual goal of maintaining the dividend and reducing leverage and what the market was missing.
Whitehouse said that nothing has changed, although perhaps the company should have been clearer about how long deleveraging would take. They are not mutually exclusive goals and the company is still focused on getting to 2.5x leverage. He noted that there is a balancing act between meeting customer needs and satisfying investors.
On December 5, Maggie Wilderotter, Chairman, CEO and President, along with Donald Shassian, CFO and Executive Vice President, spoke at the UBS Media and Communications Conference. They also maintained that the company was on track with broadband availability, cost synergies and the conversion to legacy systems. Also discussed was the impact of a new FCC report about changes to the USF. The report was more than 600 pages, left certain issues open and had not been fully reviewed, but was believed to be neutral for Frontier. When the question about Verizon's recent deal with the cable companies came up, Wilderotter expressed no concern at all. There were however two points that may have raised some concerns with analysts and investors.
The first dealt with revenue. Wilderotter said that the number of new broadband customers in Q4 would be coming in less than Q3 as the company focused resources on the cutover to legacy systems in October. It was also noted that there was a continued loss of traditional land-line customers, although the rate of decline was lessening. Any time top line growth comes into question, analysts and investors get concerned, even if the situation is only temporary.
The second point was about the dividend and leverage level. Wilderotter was asked to respond to those that thought the dividend should be cut in order to reduce the leverage. She said that Frontier had always intended to be shareholder friendly and expected to pay a high dividend of around 7-8%. She went on to say that they have made no statements about cutting the dividend and that the payout ratio in the mid-70s had been expected when the merger took place.
She also said the company wants to reduce leverage from 3-3.1x to 2.5-2.6x and that they expect to do this by improving on the fundamentals and paying down debt. They want to drive the dividend payout ratio to below 50%. These are goals for the 2013 time frame. Some of this will happen as the company completes the broadband rollout and the cap-ex declines from 18-19% to a more traditional 10-11% range. Some will come from cost savings and revenue growth.
I remain long, really like the 15% yield and have recently added to my position. I began this article with a reference to Chuck Wepner, the Bayonne Bleeder. He also fought Muhammad Ali for the heavyweight title. He knocked the champ down in the 9th round with a body blow to the ribs (although Ali claimed Wepner stepped on his foot). Wepner fought into round 15 before the referee stopped the fight on a TKO with 19 seconds left. Wepner also fought wrestler Andre the Giant. Does this sound familiar? Wepner has been said to be the inspiration for the movie Rocky.
Rocky went the full 15 rounds. Frontier is yielding a full 15%. I hope the market will let this beaten-up stock emulate Rocky and get back up off the canvas.
Disclosure: I am long FTR, VZ, CMCSA, BAC.
Additional disclosure: I have no positions in TWC or UBS and may add to my Frontier position at any time.
Source: http://seekingalpha.com/article/314366-can-beaten-down-frontier-communications-keep-on-fighting
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